ABASA Comments on SARS Discussion Paper on Section 103 of the Income Tax Act

01 February 2005


    1. ABASA ("Association for the Advancement of Black Accountants in Southern Africa") would like to take this opportunity to congratulate and commend the government, through SARS and National Treasury, in its continued efforts in continuing to combat schemes that will ensure that we eventually achieve tax parity/equality amongst taxpayers. We see this as linking to the efforts that will eventually lead to the reduction of tax rates in future as more and more taxpayers will be coming into the pool.
    2. Whilst we acknowledge that each taxpayer is entitled to arrange their tax affairs so that they pay as minimum tax as possible, this has to be done within the legal limits as provided by the acts and this process should also not be seen to be jeopardizing the rights and obligations of taxpayers as well.
    3. Therefore it is imperative that the process of amendment to section 103 should also be followed by other improvements or amendments in the other sections of the Income Tax Act as this will greatly assist in helping closing the loopholes that currently exists at the moment.
    4. This process should automatically be linked with efforts to reduce the marginal rates to acceptable levels i.e. 35% as we believe that this is the ultimate goal we should be trying to get to. We believe that in the long run there would be no need for section 103 or tax avoidance schemes when the rate is at a reasonable or acceptable levels.

2. Comment on the discussion paper.

It has to be noted that section 103 of the Income Tax Act has not been very successful in combating the tax avoidance in South Africa due to the complexity in proving the ‘abnormality requirement’. It is with that in mind that a lot of work needs to be put in that area to ensure there no loopholes created going forward. We probable need to consider legal backing around this area.

Putting one of the reasons as provided on the list to be in existence for an abnormality test to apply might not achieve the desired outcome, a transaction will need to be subjected to a number of tests before it can be deemed to be abnormal i.e. business purpose test, substance over form, tax avoidance as one of the main purpose, existence of ‘washing machines’ in a structure. Otherwise there might be unintended consequences with legitimate transactions being hit in the process just because they happen to have some of these elements in them.

The reference of structured finance transactions might be misleading in that it might be the only transactions that are being targeted whereas there are other transactions which fall in this category. We also believe that this process is not sustainable as it requires each transaction to be examined on a case by case scenario which is not time consuming and a waste on resources. We need a blanket legislation that will deal with this transaction through proper process or procedure without an exhaustive.

In that regard we believe that the completion of the Advanced Ruling System is key in ensuring that SARS provide greater certainty and clear guidance in respect to the treatment of certain tax matters. This will help in closing some of the loopholes that have actually been created by the Act itself. The same applies with regards to Practice Notes which are not binding on SARS at the moment. SARS can create certainty to taxpayers by ensuring Practice Notes issued are binding on them and taxpayers. There is a greater need to look at some of the acts that has resulted in loopholes arising and target at closing those rather than going through section 103 because it can be a long winded process and that could be time consuming i.e. the introduction of section 24J has resulted in unintended consequences for SARS.

The reference to the fact this legislation might lead to negative impact on BEE transactions is misleading because these transactions were not necessarily the major beneficiaries of these structures. The government can introduce a different piece of legislation which is aimed at encouraging BEE specifically rather than use this as an excuse to change the law. In any case it can be argued that through the introduction of small business corporation tax at 15% is aimed at encouraging more BEE to enter the business fore.

With regards to the tax havens, perhaps a consideration should be given to disallow or limit deductions from these areas to the income that is generated from these areas as they seem to lead an erosion of our tax base without providing with any or tangible economic activities. We believe that the rules around controlled foreign entities should be enhanced to adequately cover this area.

Finally we believe that the time that has been given to provide commentary on the proposed amendment has not been sufficient given that it came around during the festive so we have had extensive consultation with our members. We would advise that further work or commentary need to sought before the proposed amendment are promulgated into the Act.

For and on behalf of ABASA National Board

Avhashoni Ramikosi

ABASA National President